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3 Stocks With High Debt To Equity Ratio
When you hear the word "debt," the first thing that springs to mind is a burden. In the corporate sector, however, debt is required to extend the scale of a corporation. The debt-to-equity ratio indicates how leveraged a firm is; the lower the ratio, the better the company's financial situation.
Debt is important because it drives a company's ambitions and allows it to expand and thrive. But, as we all know, too much of anything is useless. As a result, whenever debt levels are alarmingly high, you will be in a more perilous situation as an investor.
Debt ratio
The debt ratio indicates how leveraged a business is. It analyses a company's assets and liabilities and provides information on the company's debt situation. It is usually desirable to have a ratio that is less than one. Companies in the capital-intensive sector, on the other hand, may have a smaller ratio. As a result, peer-to-peer comparison may be the best option.
The debt ratio is calculated using the following formula:
Debt ratio = Total debt / Total assets
Here are 3 highly leveraged companies with high debt to equity ratio
Adani Power
In India, Adani Power Limited generates and transmits electricity through long-term power purchase agreements and on a commercial basis. As of March 2021, the company's total debt was Rs 650,263 m. During the same time period, its net worth was Rs 4,976 million.
The debt to equity (D/E) ratio is 131 when total debt is divided by net worth. The higher the ratio, the more debt a company has in comparison to its equity. An excessively high percentage can cause troubles in your small organisation.
The debt load of Adani's six companies is quite high, which is also a cause of worry for investors. is. Investors will be watching to see how much debt Gautam Adani can cut in the coming days.
Tata Communications
As of March 31, 2021, Tata Communication's total debt was Rs 99,585 million. During the same time period, the company's total equity was Rs 1,155 million.
When we divide the entire debt by total equity, we get an 86 D/E ratio.
The profit and cash flow of the Tata group companies improved in the fiscal year 2021. Tata Communications' debt was $98.1 billion at the end of March 2021, down from $108.1 billion a year earlier. On the other hand, it has $23.2 billion in cash, resulting in a net debt of $74.9 billion.
Cholamandalam Financial Holdings
As of March 31, 2021, Cholamandalam Financial Holdings' total debt was Rs 637,972 million. During the same time period, the company's total equity was Rs 53,859 million. When we divide the entire debt by total equity, we get an 11.8 D/E ratio.
Only 2.7 percent of trading sessions in the last 16 years had intraday gains of more than 5%. The stock returned 13.88 percent over three years, compared to 49.42 percent for the Nifty Midcap 100.
Conclusion
Banks and financial institutions are not included in the above list because they tend to have higher debt levels because they borrow funds to lend. If we do add them, though, the list will become bloated.
Maintaining a low ratio would also indicate that businesses are not making use of the capital they have available for investment. This might make the corporation vulnerable to a leveraged buyout. Varying industries have different debt-to-equity ratios that are considered "safe" or "normal." When estimating the relevance of the ratio, take into account industry-specific trends.
It's crucial to figure out what to include in the debt-to-equity equation's liabilities section. Some businesses choose to integrate short- and long-term debt, while others prefer to assess each separately. This is significant because the ratio does not indicate when debts must be paid on its own. When the bulk of loans are long-term, a high debt-to-equity ratio is less concerning than when debt payments are due soon.
